The relevance of governance quality for enhancing entrepreneurship

This study examines the impact of institutional quality on entrepreneurial activity, considering the Worldwide Governance Indicators (WGI). Using a panel dataset of 46 countries over the period 2010–2020, the study employs a Two-Step System GMM estimator to address potential endogeneity inherent in cross-country institutional data. Entrepreneurship is measured through Total Early-Stage Entrepreneurial Activity (TEA) and Employee Entrepreneurial Activity (EEA). The empirical results suggest that Voice and Accountability, Government Effectiveness, Regulatory Quality, and Control of Corruption, exert a positive influence on entrepreneurial activity by reducing information asymmetries and transaction costs. However, Political Stability and Rule of Law yield negative or marginally significant coefficients. These findings suggest the presence of institutional sclerosis (Olson Citation1982) in highly stable contexts and a formality trap (De Soto Citation1989), where excessive legal rigidity may increase disproportional compliance costs for nascent firms, thereby displacing informal or marginal entrepreneurship. This research contributes to the literature by challenging the monolithic view of governance. It provides a nuanced understanding of institutional paradoxes, demonstrating that better-quality institutions do not always lead to a higher volume of entrepreneurship. Furthermore, it highlights the systemic nature of governance, which influences independent startups and corporate innovation in a remarkably similar manner.